Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: What is the fair market value of warrants that are contributed to a TFSA? Is it the warrants' intrinsic value?
Position: Question of fact.
Reasons: It is the CRA's position that an appropriate valuation method should be used in the particular circumstances to determine the fair market value of an option, warrant or similar right that is contributed to a TFSA. The intrinsic value of a warrant my not be reflective of the warrant's fair market value.
XXXXXXXXXX 2009-030543
G. Allen
October 30, 2009
Dear XXXXXXXXXX :
Re: Warrants and the Tax-Free Savings Account (TFSA)
This letter is further to your email of January 7, 2009 concerning contributing warrants to a TFSA.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.
Pursuant to paragraph 4900(1)(e) of the Income Tax Regulations, a warrant is a qualified investment for a TFSA trust if it gives the holder of the warrant the right to acquire, either immediately or in the future, property that is a qualified investment. In general, the property that may be acquired by the holder of the warrant must be a share of, a unit of, a debt issued by, or certain warrants issued by the issuer of the warrant and the issuer cannot be a connected person in relation to the TFSA trust.
Where property such as a warrant is contributed by a taxpayer, the holder of a TFSA, to a TFSA, the property must be contributed to the TFSA at its fair market value (FMV) and the contribution is subject to the holder's unused TFSA contribution room. The FMV of a particular warrant is a question of fact. The CRA is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV. Rather, it is the CRA's view that a valuation method that is appropriate in the circumstances should be used to determine the FMV of an option, warrant, or similar right.
Where warrants are contributed to a TFSA trust, the legal owner and holder of the warrants is the TFSA trust. Accordingly, it is the TFSA trust that will exercise the warrant, acquire the underlying property that the warrant gives the holder the right to acquire, and therefore any costs incurred by the TFSA trust in relation to the acquisition of property by the TFSA trust are appropriately borne by the TFSA trust.
On October 16, 2009 in a Finance Canada News Release, available at: http://www.fin.gc.ca/n08/09-099-eng.asp, proposed amendments were announced to prohibit asset transfer transactions (swaps) between TFSAs and other registered and non-registered accounts. This prohibition would apply to transfers effected between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length. It is proposed that this measure apply to transactions occurring after the date of the news release. With respect to swap transactions involving TFSAs that may have occurred prior to October 17, 2009, the CRA will be examining any unusual TFSA transactions and applying the existing TFSA rules to challenge aggressive tax planning where appropriate.
We trust that our comments will be of assistance to you.
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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